Firms show business confidence with spate of bonus share issues

Mumbai: The recent spate of bonus issues indicates that Indian firms aren’t fazed by inflation, rising raw material prices and the fall in the stock markets, and remain confident about their ability to grow and return more profits.

Despite a slowdown in revenue and profit growth in the fourth quarter of 2007-08, firms are continuing to announce bonus issues even as investors fear rising raw material prices and soaring inflation will take the sheen out of Indian companies. The growth in net profits of more than 2,000 listed firms that have announced their earnings for the January-March quarter is at an eight-quarter low of 11.24%.

Bonus shares are additional shares issued free of cost to existing shareholders by converting free reserves of a company into equity capital.

The issue of such shares indicates a company’s confidence as it needs to service bigger equity base and distribute more dividend. And, unless a company returns more profit, it will not be in a position to take care of a higher dividend payout.

So far this year, 23 companies have announced bonus issues of equity shares against 30 such issues in the corresponding period in 2007.

Engineering giant Larsen and Toubro Ltd (L&T), Mumbai-based financial services boutique JM Financial Ltd and Bank of Rajasthan Ltd, are the latest to join the group of firms that has announced bonus issues this year.

While Bank of Rajasthan announced one bonus share for every five shares (1:5) its shareholders owned, JM Financial has liberally announced three for every two owned and L&T will distribute one share for every share held by its investors.

Following a bonus issue, the number of shares of a company traded in the market increases. This creates greater liquidity in the stock but reduce its effective earnings per share (EPS) and book value.

The book value of a stock is the net worth (equity capital plus reserves and surplus) divided by total number of shares while EPS is net profit divided by average outstanding equity shares.

Apart from increasing liquidity, a bonus issue is one way in which promoters communicate the company’s prospects to investors, said a senior executive at iron ore exporter Sesa Goa Ltd. He asked not to be named citing his company’s policy.

Sesa Goa had announced a one-for-one stock bonus issue in April.

Some companies could have chosen to issue bonus shares because of their bloated reserves and relatively smaller equity base, said analysts. L&T could be one of them.

Apart from L&T, JM Financial and Sesa Goa, the list of firms that announced bonus shares includes Container Corp. of India Ltd, Gujarat Mineral Development Corp. Ltd, Siemens Ltd, Biocon Ltd, Shipping Corp. of India Ltd, Housing Development and Infrastructure Ltd (HDIL) and Opto Circuits (India) Ltd. All of them are part of the Bombay Stock Exchange’s index of the top 500 firms by market value.

Some relatively lesser known firms such as ELF Trading and Chemicals Manufacturing Ltd have also announced bonus share issues. ELF is shelling out three shares for every share owned by its investors.

Reliance Power Ltd, which made history by raising close to Rs12,000 crore from the capital market through an initial public offering (IPO) in January, also issued bonus shares to its investors—three shares for every five shares held. This was done to compensate for the losses suffered by the investors after the stock plunged after its listing.